A reverse mortgage usually pays a lump sum and is not used to acquire a property. Because these characteristics differ from the type of loan used to buy a home that we are all used to, it has been given the “reverse” moniker.
Typically a reverse mortgage borrower uses the equity in the home to meet obligations the owner is unable to pay due to a lack of cash flow. The amount of the loan is based on the equity or the value in the borrower’s home. No payments are made, and traditionally the loan becomes due and payable in full upon the happening of certain events; most often the death of the home owner, but also if the dwelling is sold, or the borrower ceases to occupy the dwelling as a principal dwelling.
As a result, this type of loan is a niche product, only suitable for a select group of homeowners. But some mortgage brokers discovered how lucrative these loans were, and they encouraged their use when a reverse mortgage was not the right choice for the particular borrower. Other problems included hard sell tactics, high costs and undisclosed costs.
Unfortunately these abuses have given reverse mortgages a bad name. However, Arizona recently enacted various new provisions regulating the origination of reverse mortgages. These statutes should eliminate the lack of advice and disclosure which made it difficult for borrowers to evaluate whether a reverse mortgage was right for them.
The terms of the loans are minimally regulated. It is their creation by the “originator,” that are dictated, by a series of disclosure requirements applicable throughout the reverse mortgage origination process.
Prior to accepting a final reverse mortgage application or assessing any fees, a loan originator must: (1) provide the borrower with a list of at least five housing counseling agencies, including two that can provide counseling by telephone; and (2) receive certification that the borrower has received counseling. These requirements try to ensure that if the originator fails to assist the borrowers in determining whether is suitable, someone else will.
The new provisions also require that at least 10 days prior to closing, the originator provide a statement informing the borrower that the borrower’s liability is limited under the reverse mortgage (it is non-recourse), and explaining the borrower’s rights, obligations, and remedies as well as all conditions requiring satisfaction of the loan obligation.
Prior to entering into a reverse mortgage, an originator must disclose: (1) all costs charged by the originator, including costs of other services that are related to the reverse mortgage, but not required in order to obtain the reverse mortgage (e.g., estate planning, financial advice, etc.), clearly identifying which charges are required in order to obtain the reverse mortgage and which charges are not; (2) all terms and provisions regarding insurance, repairs, alterations, payment of taxes, default reserve, delinquency charges, foreclosure proceedings, anticipation of maturity, and any additional second liens; and (3) the projected total cost of the reverse mortgage, based on the projected total future loan balance for at least two projected loan terms, including the cost for a short-term mortgage, and the cost for a loan term equaling the borrower’s actuarial life expectancy.
Additional protections in the new statutes include prohibitions on cross-selling – the practice of inducing borrowers to agree to buy an annuity, an investment or long-term care insurance before the closing of the reverse mortgage.
Thanks to the new law, reverse mortgage customers are required to give their informed consent to the terms of the loan. Since those terms are complicated and unfamiliar to most borrowers, it is absolutely essential to understand what they are in order to determine whether a reverse mortgage is suitable and affordable. Now the only practical limitation to greater use of these loans is the lack of equity many home owners have in their residences in the metropolitan Phoenix area.
We can assist a careful analysis of your needs. If you would like us to help determine whether a reverse mortgage makes sense for you, you can reach me at 480 675-0112, or at mark@simplysoldaz.com.